The new protectionism: protectionism doesn't save jobs or raise anyone's living standard.

THE "America is in decline" crowd is at it again. You remember them: clutching copies of Paul Kennedy's The Rise and Fall of the Great Powers, they claimed that America was the victim of "imperial overstretch" and would soon collapse under the weight of its worldwide commitments, following Spain, Britain, and other former great powers into the dustbin of history.

No such luck. Instead, the USSR unraveled and America provied in Iraq its singular ability to project power on a global scale, albeit using a form of shared-burden financing that didn't occur to Philip II or Queen Victoria.

So the declinists retreated, to re-emerge under a new Japan-bashing, protectionist banner. Seizing on a combination of racist ignorance and quite sensible outrage at Japan's unfair trading practices, the declinists profess to seen in our trade deficit the same symptoms of decline they previously attributed to Reaganomics: The American education system, starved for funds, is producing workers ill trained to cope with the new, intense international competition for markets. American manufacturing industries, suffering from a decade of laissez-faire policies and lacking the benefits of a MITI-like partnership with government, are unwilling or unable to produce the world-class goods that international markets demand. Only the rich, able to substitute private services (schools, pools, limousines) for cash-starved public ones, face the 1990s with equanimity.

So the dirge goes. The solutions are obvious to the mourners: an "industrial policy" that brings government into the business sector, "managed trade" to cut off imports of goods that hurt domestic industries otherwise destined to be "winners," and more spending on education, health care, and everything else. But such an expansion of social programs, to be paid by businesses directly or through higher taxes, will drive up costs of domestic manufacturers, making them more vulnerable to foreign competition. So protectionism is needed to shield high-cost American firms from competition from polluting Mexican industries and worker-abusing Asian industries, Protectionism, in short, is the cornerstone of any costly program of expanded social benefits. Without it, the cost of new programs would make American industry non-competitive.

That's why the fight to preserve something close to the present world trading system is so crucial. For free trade--or, at minimum, trade no less free than it now is--keeps competitive pressure on American businesses to keep costs down, and on American politicians not to drive those costs up by forcing businesses to finance programs that voters explicity refuse to pay for with higher taxes.

Making the Case

THE CASE for free trade starts with theory, is supported by experience, and is clinched by a consideration of the alternatives.

The theory is quite simple, and best stated by Adam Smith:

It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy. The taylor does not attempt to make his own shoes, but buys them of the shoemaker. The shoemaker does not attempt to make his own cloaths, but employs a taylor. The farmer attempts to make neither the one nor the other, but employs those different artificers. . . .

What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our industry, employed in a way in which we have some advantage.

It is, in short, foolish for us to expend $300 worth of labor, capital, and other resources to produce a VCR when Japan will sell it to us for $150. Perhaps, grumble the protectionists. But allowing foreigners access to our markets threatens what chief car salesman George Bush refers to as "jobs, jobs, jobs." Not so.

The post-World War II expansion of world trade brought with it one of the longest periods of sustained prosperity the world has ever known. The years between 1950 and 1973 were a golden era of free trade, with tariffs tumbling and non-tariff barriers not yet common. World trade grew at an annual rate of almost 7 per cent, and world income at a bit under 5 per cent. Not all of the rising prosperity was a result of the increased international exchange of goods and services. But some was: the growth in trade allowed countries to specialize in those goods they could most efficiently produce, and to exchange them for the efficiently produced goods of other countries.

The Seeds of Decline?

UNFORTUNATELY, the growth in world trade coincided with an end to the trade surpluses to which America had become accustomed, causing some to see in that trade growth the seeds of American decline. In 1971 we ran our first merchandise trade deficit since 1893, and only our third since 1876. In 1983, we began persistently to import more goods and services than we exported. The reasons offered range from an overvalued dollar consequent on President Reagan's allegedly misguided economic policies, to Japan's insistence on closing its markets to American goods, thereby converting our free-trade policy into one of unilateral disarmament in the new economic war. Whatever the reason, America began running merchandise trade deficits with Japan in 1965, and has done so ever since.

These deficits had four characteristics that played into the hands of protectionists. First, they appeared on President Reagan's watch, making them a natural target of Democrats (anyhow beholden to the trade unions, whose members were most affected) and of the liberal media, whose anchors and scriveners gagged on the obvious success of Reaganomics.

Equally important, the deficits were more than dry statistics tumbling out of some government office. Unlike the federal deficit, which you can't see, hear, or touch, the trade deficit has visible physical manifestations. You can see a Mitsubishi television set, hear a Sony Walkman, touch a Toyota. Our exports, on the other hand, are visible to only a few--Boeing's work force and a few American passengers might notice that Japan Air Lines flies made-in-America 747s, but most Americans don't.

Third, America's burgeoning trade deficits coincides with the crumbling of the instutition most closely associated with the success of American capitalism: the giant corporation. Chrysler, General Motors, and Ford, dinosaurs managed by Neanderthals, proved insufficiently in touch with their markets to respond to Japanese competition. IBM eventually had to strip down and make a belated effort to develop "intrapreneurship." America's large steel makers failed to invest in the new technology that their smaller, more flexible rivals, domestic and foreign, were installing. And huge banks such as Citicorp came as close to ruin as a survivor can--for reasons having nothing to do with foreign competition.

In short, the American economy and its corporate form of organization were under threat from more efficient "raiders," eager to break conglomerates into manageable bits, and from more flexible entrepreneurs (a man and his computer in a beach hut is now a desk-top publisher; a man and his brain in a Silicon Valley garage can now outcompete a large corporate rival). And from foreign competitors. But the latter received all of the blame for the plight of the traditional corporocrats--not least because those executives' well-oiled public-relations machines tirelessly cited Japanese perfidy--rather than their own inefficiency, their insulation from the interests of their shareholders, and their lack of contact with consumers--as the source of America's problems.

That is not to say the Japanese are blameless. Their persistent refusal to open their markets to American and other products is the final reasons--and perhaps the most important one--for such success as the protectionists have had. Using product standards to bar the import of skis because foreign skis are allegedly unsuitable for Japanese snow, arguing that restricting the import of rice is necessary to food self-sufficiency and national defense, limiting the availability of high-technology products, and using procurement rules to prevent foreigners from bidding on large construction projects, the Japanese nevertheless profess amazement at the irritation provoked by their one-way version of free trade.

But irritation is not a basis for policy. The public interest is. and that interest is hardly served by denying Americans access to reasonably priced, easily maintained automobiles and consumer electronic products. Indeed, one has only to compare Japanese with American living standards to see who suffers from protectionism, and who benefits from free trade. The Japanese protect their inefficient farmers, forcing Japanese consumers to pay six times the world price for rice. Japanese consumers pay $30 per pound for high-quality beef that Americans buy for about half that. According to OECD estimates, the average Americans can still buy about one-third more with his earnings than can his Japanese counterpart. On current trends it will take the Japanese until well into the next century to catch up.

Americans have more than one car for every two people, the Japanese fewer than one for every four. We have 20 per cent more telephones and 40 per cent more TV sets per capita. Newly built houses in America average more than two thousand square feet; a Japanese family moving into a newly built house (older ones are smaller) must squeeze into half that space. Americans also have more parks, shorter travel-to-work times, and more leisure facilities than do the Japanese.

Little wonder that few residents of Beverly Hills, or even New York, want to live in Japan, while the reverse traffic is far from significant. Japan is not some Oriental Eden. It is an island nation of overworked, under-served consumers longing to breathe free . . . trade. Even so, its trade surplus with America is steadily shrinking, and highly concentrated in one sector--automobiles. About 75 per cent of our deficit with Japan is due to our preference for efficient Toyotas and Nissans, and their unwillingness to return the favor by buying American cars that have the steering wheels on the wrong side, consume too much gasoline, and are too big to fit in most Japanese driveways and on many streets. True, the Japanese make it difficult for foreign manufacturers to sell cars to them. But it is most likely the case that the Japanese are better car makers than we are, just as the Saudis are more efficient oil producers and we are more efficient air-frame manufacturers. This latter superiority is not an anomaly, an island of American success in a sea of failure. Harvard's Joseph Nye (Bound to Lead) estimates that America now accounts for about 25 per cent of world product--almost the same share it accounted for in the mid 1960s, and in 1938, and even in 1900. Only in the period immediately following World War II, when Europe and Japan were in ruins, did America's share soar to the levels that present-day protectionists use as a target.

Nor is it true that the mix of what we produce has shown a nasty tendency to emphasize low-value goods and commodities. Andrew Warner, staff economist at the Federal Reserve Board, estimates that capital goods such as computers and industrial machinery (but excluding autos and defense goods) account for a rising share both of U.S. manufacturing output and of exports. They now account for 38 per cent of total manufacturers, up from 28 per cent in 1967. And exports of capital goods have risen to 4 per cent of our gross domestic product (GDP), compared with only 1.4 per cent in the late 1960s. In the end, America remains the world's largest exporter of aircraft, agricultural and industrial chemicals, office and computing machines, and engines; and is second in electrical machinery, plastics, and (legal) drugs.

And yet, and yet . . .

Good End, Wrong Means

THE protectionist arguments resonate with some voters. This is especially true in a recession, when unemployment is a concern. But if the aim of protectionism is to save or create jobs, it is an expensive and inefficient means to that end. Japan's acceptance of President Reagan's "voluntary" restriction on auto imports cost $240,000 annually per job saved, according to the staff of the Federal Trade Commission. And it added $1,300 to the price of every car imported from Japan in 1984, according to the U.s. International Trade Commission.

Similar restrictions on steel imports are estimated by the Federal Trade Commission staff to have cost consumers $113,622 per year per steel-industry job saved. Worse still, the International Trade Commission found that job losses in steel-using industries off-set the 20,000 to 22,000 steel jobs preserved; because of higher costs, those industries saw their export markets shrink. And it apparently costs about $76,000 for us to protect each job in the sugar business at a total cost to consumers of $3 billion per year.

It would be far cheaper to pay all these workers to stay home than to protect their jobs. And far more sensible to give them a lump sum to use for retraining, or to retire, if we decide they warrant special consideration. It would also make sense to ignore Japan's protectionism, and gleefully accept any subsidized exports they send our way. If they want to deny themselves access to our beef, why should we respond by denying ourselves access to their cars? Why not turn the other cheek when hit by Japanese restrictions on U.S. imports?

Because it would, in the end, be both economically unsound and politically impossible to do so. The economically sound approach would be to try to persuade Japan to open its markets to our goods and services, which would increase employment here and consumer welfare in Japan. That will take unremitting pressure on Japan's politicians, who are no braver than ours (or those in France and Germany) when it comes to facing down politically overrepresented farmers and other organized pressure groups. Only if threatened with consequences worse than the loss of some farm votes will Japanese politicians loosen restrictions on agricultural imports; only if threatened with reduced employment in their export industries will they say "no" to the small retailers who want to bar American mass merchandisers from their shores. Other-cheek-turning will not get trade barriers lowered.

So, too, with the host of other barriers. Japan seems quite unembarrased to be a world pariah, using the doctrine of free trade to support its export drive while relying on mrechantilist policies to restrain imports. It uses product standards that don't conform to international norms to keep out metal baseball bats, certification procedures to exclude foreign-made medical and communications equipment, the patent approval process to delay the use of foreign technologies until Japanese firms have copied them, and procurement practices to keep out communications satellites and supercomputers. The list goes on.

And suggests the solution, or if not the solution at least the optimal policy approach. That involves, first, the good sense to ignore attempts to use trade problems as an excuse to support some other program. Certainly we should improve our educational system. And wage a war on drugs. And save the ozone layer. And improve the infrastructure. If such progrmas are worth pursuing, they should be pursued--whether we have a trade deficit or a trade surplus.

Second, don't put much faith in programs designed to make us more like the Japanese and the Japanese more like us. Any policy based on the notion that we can somehow persuade or force the Japanese to take more vacations, give up their right relationships between businesses and banks, or save less is doomed to failure. So, too, is any policy aimed at getting Americans to give up vacations, work harder, live in smaller houses, and in other ways be less "self-indulgent." We may want the Japanese to be more like us, and they may think the world would be a better place if we werre more like them. But such forced cultural convergence is just not in the cards.

Finally, we can abandon all notions of adhering to a textbook program of free trade, unilateral if necessary. That jus won't wash, politically. Americans' sense of fairness would be offended by the notion that their freetrading (not entirely true), open, competitive country was doing nothing to wring concessions from protectionist (not entirely true), closed, cartelized Japan. So although it may be counter-productive to react to Japan's refusal to open its markets to us by closing some of our markets to the Japanese, react we will. That reaction, however, need not take the form of old-style protectionism, or its modern variant, "managed trade." The economic arguments against that are too powerful, the linkage between freer trade and worldwide economic growth too obvious, for the Gephardts of the world to carry the day politically. On a more mundane level, Americans are simply too smart to give up their inexpensive and mechanically sound VCRs, television sets, and automobiles, in order to avenge themselves on unfair Japanese traders.

That leaves only one course, a middle ground between protectionism and unilateral free trade. This is neither neat nor intellectually satisfying: the purity of free-trade theory can't comfortably enfold a dash of reciprocal protection, even as a weapon to open markets. But the use of market-closing threats to pry markets open is the only tool available to move us to freer trade. And not only with Japan.

We are currently involved in tough negotiations with the Europeans in the so-called Uruguay Round to extend GATT. Those negotiations have made it clear that early fears of a Fortress Europe are well founded. Scratch a European "federalist" and you find a protectionist. Dirigiste French ministers want to protect the European Community's auto manufacturers from Japanese, American, and even British-made (but Japanese-marqued) cars. EC farmers want to exclude Polish hams and Eastern European produce. Germans, lumbered with the costs of their welfare state, tradeunion work rules, and unification, view foreign competition with increasing antipathy. And all EC members willingly heed France's call for quotas on American films and television programs.

We can't bring down the walls of this new fortress by reading passages from The Wealth of Nations to EC President Jacques Delors. So we must find a way to strengthen our position vis-a-vis Europe as well as Japan. Enter the North American Free Trade Agreement. By creating a common market with our Mexican and Canadian neighbors we gain two advantages: the efficiencies of freer trade with them, and a larger bloc with which to confront the Europeans and Japanese. Neither would like being excluded from U.S. markets; they would fear even more the combined retaliatory power of Canada, Mexico, the United States, and, eventually, Latin America.

A third trade bloc, to joust with Japan and Europe? Alas, yes. By use of the reciprocity club, especially to obtain multilateral trade openings, is precisely the policy that underlies GATT and that has been the basis of U.S. trade dealings, most notably with Japan, but with Europe as well. This means walking the line betwen protectionism and unilateral economic disarmament by keeping the pressure on the Japanese and other trading partners to open their markets, threatening them with selective retaliation if they do not, and actually retaliating with sufficient frequency to make the threat credible. This may not be as instantly gratifying as Japan-bashing and a policy described by one British tabloid a "up yours, Delors," or as grand as plans to bring American and Japanese lifestyles and domestic policies into harmony, or as theoretically correct as a policy of unilateral free trade. But it is economically sound and politically viable, and should keep chipping away at the impediments to trade that impoverish all participants in the world economy.

Mr. Stelzer is a Resident Scholar at the American Enterprise Institute.